Illustration 10: Swastik Ltd is manufacturers of special purpose machine tools have two divisions

which are periodically assisted by visiting teams of consultants. The management is worried
about the steady increase of expense in this regard over years. An analysis of last years expenses
reveals the:
Consultant remuneration
Particulars
Rs
Travel and conveyance
Rs 1,50,000
Accommodation expenses
Rs 6,00,000
Travel charges
Rs 2,00,000
Special allowances
Rs 50,000
The management estimates accommodation expenses to increase by Rs 2,00,000 annually.
As part of a cost reduction drive, Swastik Ltd are proposing to conduct a consultancy to take of
accommodation requirements of the consultants. This centre will additionally save the company
accommodation charges and Rs 2,00,000 in the cost executive training programmes hitherto
conducted outside the company premises every year.
The following details are available regarding the construction and maintenance of the new centre
:
(a) Land at a cost of Rs 8,00,000 already owned by the company will be used. The land was
given on rent of Rs 50,000 per year
(b) Construction cost Rs 15,00,000 including special furnishings
(c ) Cost of annual maintenance Rs 1,50,000
(d) Construction cost will be written off over 5 years being the useful life.
Assuming that write off of construction cost as aforesaid will be accepted for tax purpose, the tax
rate will be 35% and required rate of return is 12%. Calculate NPV.
Illustration 11: SCL Limited is a highly profitable company; it is engaged in the manufacture of
power .The company want to make a wind mill. The details of the scheme are as follows:
1) Cost of windmill Rs 600 Lacs.
2) Cost of the land Rs 15 Lacs. Working capital required is Rs 50 Lacs
3) Subsidy from the state government to be received at the end of the first year of installation Rs
15 Lac
4) Selling price of electricity will be 2.25 unit per year 1. This will increase by 0.25 per unit
every year till year 7. After that it will increase by 0.50 per unit.
5) Maintenance cost will be Rs 4 Lacs in the year 1 and the same will increase by Rs 2 Lacs
every year.
6) Estimated life 10 years.
7) Cost of capital 12%.
8) Residual value of the windmill will be nil. However land will go up Rs 60 Lacs at the end of
the year 10.
9) As the wind mill are expected to work on wind velocity, the efficiency expected to be an
average of 30%. Gross electricity generated at this level will be 25 Lacs units p.a. 4% of the
electricity generated will be committed free to state electricity board as per the agreement
10) Tax rate 35%

From the above information your are required to calculate the net present value